Question
Explain the relevance of time value of money in financial decisions?
Answers
Time value of money means that worth of a rupee received today is different from the worth of a rupee to be received in future. The preference of money now as compared to future money is known as time preference for money.
A rupee today is more valuable than rupee after a year due to several reasons:

 Risk: there is uncertainty about the receipt of money in future.
 Preference for present consumption
 Most of the persons and companies in general, prefer current consumption over future consumption.
 Inflation: In an inflationary period a rupee today represents a greater real purchasing power than a rupee a year hence.
 Investment opportunities: Most of the persons and companies have a preference for present money because of availabilities of opportunities of investment for earning additional cash flow.

Many financial problems involve cash flow accruing at different points of time for evaluating such cash flow an explicit consideration of time value of money is required.   Your Comment




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